ETF Trades & Updates: Crude’s Seasonal Slump By: Christopher Mistal | September 01, 2022 | Email | Print

In a typical year, crude oil tends to make significant price gains in the summer, as vacationers and the annual trek of students returning to college in August creates increased demand for unleaded gasoline. The market can also price in a premium for supply disruptions due to threats of hurricanes in the Gulf of Mexico. However, towards mid-September, we often see a seasonal tendency for prices to soften, as the driving and hurricane seasons begin to wind down. Crude oil’s seasonal decline is highlighted by the black arrow in the following chart.

 

 

Last year this trade did not work out all that well as seasonal weakness did not materialize until late-October and only briefly lasted through November and into the beginning of December. From its December low, crude oil went essentially straight up through winter and spiked higher when western sanctions began impacting Russian supplies in March. Crude did however reach a typical seasonal peak in early July this year and has been steadily retreating since then. Higher prices have caused demand to ease. Seemingly never ending Covid lockdowns in China are also weighing on demand.

 

Potential profit on this trade appears to be limited as global supplies remain tight, but higher prices have eroded demand and global economic growth is slowing. Fresh new Covid-19 lockdowns in China could also further depress demand in the near-term. Should the U.S. labor market begin to show signs of weakening, crude oil could slip even lower as recession concerns would likely expand.

 

 

ProShares UltraShort Bloomberg Crude Oil (SCO) is one vehicle to take advantage of crude’s historical seasonal weakness. SCO’s benchmark is the Bloomberg Commodity Balanced WTI Crude Oil index which is comprised of crude oil futures contracts. SCO is designed to return 200% of the inverse of the daily move of this index and has around $500 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.

 

Crude oil’s retreat since its July peak has caused a corresponding increase in SCO. Currently crude oil has weakened modestly and stochastic, relative strength and MACD Buy indicators applied to SCO have begun to improve. SCO could be considered on dips below a buy limit of $24.00. SCO will be tracked in the Almanac Investor Sector Rotation ETF Portfolio. If purchased, an initial stop loss at $21.40 is suggested.

 

 

Broad market strength in the first half of August was trouble for short positions in iShares Transportation (IYT) and SPDR Industrials (XLI). IYT and XLI both managed to breakout above projected resistance and both positions closed above their respective stop losses on August 10. As a result, IYT and XLI short positions have been covered and closed out of the portfolio for a loss. Recent declines by IYT and XLI have returned both to approximately the same level that they were initially shorted at. Even though historical seasonal weakness does last until October, we will move on.

 

Two out of three of last month’s new trade ideas have been added to the portfolio. iShares US Technology (IYW) was added on August 29 when it first traded below its buy limit. iShares Semiconductor (SOXX) was shorted on August 9 as it broke down through support at $400. As of yesterday’s close, IYW was modestly lower, off 2.3% while the short position in SOXX was up by 7.6%. Today’s newly announced semiconductor sales restrictions to China has pushed SOXX even lower. IYW and SOXX are on Hold.

 

The third new trade idea from last month, iShares Biotech (IBB) has yet to trade below its buy limit. SPDR S&P Biotech (XBI) also did not dip below its buy limit over the past four weeks. IBB and XBI can still be considered on dips below their respective buy limits.

 

 

 

 

The second month of the worst two-month span (August-September) has arrived. September had gotten off to a rather typical mixed start. After spending much of today in the red, DJIA and S&P 500 managed to rally and close with modest gains today. NASDAQ’s rebound was insufficient as it still booked a mild loss today. As a reminder, September has historically been the worst month of the year for the market since 1950 and midterm-election-year forces have only had limited effect on past Septembers. Even though the market has enjoyed a solid summer rally this year, it is not impervious to renewed weakness, correction or even another sizable one-day selloff.

 

Defensive, “Worst Months” positions in the portfolio have taken some punishment in recent weeks. All three bond ETFs are lower as the bond market continues to price in the Fed’s rate tightening pace and magnitude. iShares 20+ year Treasury bond is the worst performing of the group, off 10.6%. AGG and BND are also modestly lower excluding dividends and trading costs. Continue to Hold TLT, AGG and BND. As a reminder these bond positions are partial positions as we were anticipating some bond weakness during the current “Worst Months” period due to the Fed tightening that is currently underway. Cash continues to be the lowest risk position.